Reliance retail will spare none

Five years ago, when ET Intelligence Group put out its first Knowledge Series on Indian Retail, there was a lot of hope regarding the sector but little substance. The numbers being talked about then were also miniscule.

In FY02 the size of the entire organised retail business was around Rs 16,000 crore. Following industry interactions, ETIG projected a size of Rs 37,000 crore for FY07 at an annual growth rate of 20%.

In the last five years or so, organised retail has indeed made massive progress. However, a large part of organised retail remains small, fragmented and unlisted. While the largest player Pantaloon Retail has reached a somewhat respectable turnover of around Rs 1,600 crore over the past four quarters, the next biggest entity is barely above Rs 500 crore at this point.

So, for all the promise, organised retail has neither made a major dent in the urban retail landscape or shopping habits (except perhaps in the top 6-8 cities) nor has it greatly affected producers and suppliers of consumer goods.

But all that may be about to change. The days of slow change may be behind us. Organised retail may be all ready to aggressively woo the Indian consumer. Reliance Industries’ mega plan to invest Rs 25,000 crore in retail by ‘10 can completely alter the current Indian retail scenario.

In chairman Mukesh Ambani’s words, it will be ‘a retail network that is unprecedented in scope and unparalleled in execution. It will have a pan-India footprint covering 1,500 cities and towns’. Reliance already has 2,000 people in its retail initiative. This will grow to 500,000 as the business unfolds. As usual, Reliance is talking some incredible numbers. This time, the scope is far larger.

Massive Numbers: Now let’s try to get some perspective on the enormity of the announcement. By ‘10, Reliance seems to be targeting a turnover of Rs 90,000 crore from 100m square feet of retail space. Pantaloon is not sitting idle either. In a recent presentation, the company had projected a sales run rate of Rs 30,000 crore from a turnover of 30m square feet by ‘10.

Assuming the other current and future retail players are also up to something, the organised retail industry is talking of a size of Rs 150,000-200,000 crore ($34-45bn). This may not happen in ‘10, but looks more likely in ‘12. Clearly, the industry is set for an explosive growth.

Let’s take a figure of Rs 150,000 or $33bn for organised retail by ‘12. The total addressable consumption of urban India which retail can target will be around $200bn by that time.

This means organised retail will have a 17% market share of urban consumer market by ‘12. Considering the current penetration of organised retail is barely 2-3%, this is will be a big change. According to a recent JM Morgan Stanley report, infrastructure bottlenecks and low car penetration in smaller towns, could inhibit modern retail penetration.

Big Impact: The investment boom could change the face of the retail sector in the country. The biggest change in the paradigm is that Indian consumers can expect prices to slide down rather than go up.

Industry experts’ estimates are that in the next three years there will be at least a 30% reduction in prices, especially in food and expensive products. That will have a huge impact on the average middle class consumer.

The real story for investors lies deeper. Organised retail will target areas like food, personal care, textiles, durables, furniture and other household items. Listed companies in this space had total sales of around Rs 85,000 crore in FY06. If this grows at 12% per annum over the next six years, the figure will touch around Rs 170,000 crore by FY12.

So, the retail industry could almost equal the current organised supplier base in sales. Clearly, the balance of power, which has so far been in the favour of producers, will shift to retailers. This could mean that some producers currently enjoying high margins and return on capital employed (RoCE) could feel price pressures.

There could be a huge impact on food as a category. Food comprises 50% of the total consumer spend in India, and around 75% of the addressable spend by organised retail. It’s quite obvious that spends like rent, education, transportation cannot be addressed by retail. So far, a large part of food consumption is with the unorganised sector.

While most FMCG companies like HLL, ITC, Marico, Dabur and agri-commodity companies like Ruchi Soya, Agrotech Foods, KRBL, Satnam are trying to build a profitable foods business, none of them have any decent scale.

Organised retail will have to get a considerable part of its $34-45bn turnover from foods. Even if we say a third will come from food, then around $11-15bn, or at least Rs 50,000 crore of sales will have to come from food in ‘12. Current organised players will not be that big by ‘12, given how they have fared so far.

This means organised retail will have to generate its own food sourcing, or help current suppliers grow. Reliance has said it will invest Rs 7,000 crore in supply chain initiatives. Pantaloon has large plans as well.

This could hurt the plans of some of the FMCG companies in foods. It could help some others to grow. For example, Satnam is trying to become the exclusive rice supplier to Reliance. Sectors like textile could be impacted too. Large garment makers are reportedly eyeing contracts with Reliance.

It is early days yet to discern the impact on various listed companies in the FMCG, durables or textile space. As yet it is unclear whether Reliance will build infrastructure for all brands or only for their in-house brands house.

Property wars will be another side affect of retail wars. Pantaloon, which currently has retail space of 3.1m sq feet, plans to edge up to 30m by end of ‘10. Reliance will need to set up close to 100m square feet of space by ‘10 to meet its internal targets. Out of the 300 odd malls under development in the next three years, Pantaloon has signed up with 100 of them.

So, with nearly 33% of the total retail space already blocked out, Reliance will also have to contend with other rivals like Shoppers’ Stop, Lifestyle, Trent, RPG Group and Metro. Most property consultants also expect that the total retail space that will be available in the market by ‘10 may not be more than 100m sq ft. A huge war for retail property is, therefore, on the cards.

The venture could add also add to Reliance’s value. Leading broking firm CLSA has estimated a value of Rs 160 per share for the retail venture for Reliance at this point. As Reliance adds value in retail, it could subtract value from suppliers from FMCG, textiles and so on. So watch out for the winner as the drama unfolds.